CAPEX Q3 2016

With the first three quarters of this year having witnessed significantly low spends, and with further delays expected, this year will likely end with the lowest capex spends seen in the GCC over the last decade

Similar to market expectations, 2016 is proving to be one of the slowest years in terms of project spends. While crude oil prices have seen fluctuations and drastic price drops since mid-2014, that year still saw c.USD 70bn worth of project spends, followed by c.USD 78.4bn in 2015. This year, however, has really felt the impact of the volatility in crude oil prices – with the GCC region witnessing a total of only c.USD 29.1bn worth of spends over three quarters. Although the low spends seen so far is associated with project owners doubtful of the importance or feasibility of several planned projects, the lack of spends by project owners in the region are also the result of global factors. Political indecisiveness in markets such as Europe (Brexit) & U.S. (the fear of who will become the future president) and the lack of co-operation within OPEC members have resulted in an increase in price volatility and thus has led to a cautious scenario for the oil & gas market in the GCC region.

Since the beginning of 2016, all GCC countries fell well short of awarding projects in comparison to what they had planned for the year. With multiple oil & gas mega projects planned for award this year and with H1 2016 having witnessed low spends (Q1 witnessed weak project activity while Q2 2016 saw the worst spends seen in the past 5 years), it was expected that the second half of the year would see a decent amount of project spends – to compensate for the weak spends seen in the first half. While c.USD 66bn worth of projects were planned for award in H2 of this year, it was expected that less than half (c.USD 28.6bn) would go ahead due to market conditions. The beginning of H2 2016, however, witnessed very weak spends with only c.USD 8.2bn worth of projects awarded – similar to that seen the previous quarter – making it unlikely for the GCC region to witness even our pessimistic target of planned spends.

"The beginning of H2 2016, however, witnessed very weak spends with only c.USD 8.2bn worth of projects awarded"

An analysis of what was awarded this quarter reveals that while a few large-valued projects were awarded (> USD 500mn), a majority of the projects were smaller in value. The large-valued projects that were awarded this quarter are projects that have been long delayed and include Saudi Aramco’s Fadhili IPP (c.USD 1.3bn), ENOC’s Jebel Ali Refinery Expansion (c.USD 750mn) and Alba’s Aluminium Plant Expansion: Phase 6 - PP5 (c.USD 750mn). Of the smaller-valued projects, the pipeline, oil & gas production and alternative energies sector saw the most project spends; c.USD 1.6bn, c.USD 1.5bn and c.USD 1.1bn respectively. An analysis of where these smaller-valued project awards took place reveals that Saudi Arabia, UAE and Kuwait saw the most spends; c.USD 1.7bn, c.USD 1.6bn and c.USD 1.2bn respectively.

Although Q3 2016 saw a c.5.5% increase in spends compared to that seen last quarter, this was substantially lower than what was initially expected. Figure 1 illustrates how much was planned across the various GCC countries for Q3 2016 against how much was actually awarded. Here, we see that the realization rates for all of the countries are below 30%, except for Bahrain, which saw a strong realization rate due to the award of a critical project by Alba.

The low project spends is also in line with overall national level strategies adopted by the various GCC countries. UAE, Saudi Arabia and Qatar have focused on an austerity measure with regards to new oil & gas capex spends and have focused on projects involving enhancements / improvements of existing facilities for greater efficiency. On the other hand, countries such as Kuwait and Bahrain, have gone ahead with critical spends. Whereas Kuwait has placed more importance on upstream related projects such as KOC’s Jurassic Non Associated Phase 2: East & West Raudhatain fields, Bahrain has placed more importance on its downstream related projects.

Moreover, this quarter, approximately USD 5.2bn worth of projects that were planned were put on hold or cancelled while approximately USD 25bn were postponed. An analysis of the types of projects that were put on hold or cancelled reveals that a majority of them were gas processing and water & waste projects that were to take place in UAE, Saudi Arabia and Qatar; whereas an analysis of the types of projects that were postponed reveal that most of them were from the power, refining and water & waste sectors and were to take place in Saudi Arabia, UAE and Oman.

"The low project spends is also in line with overall national level strategies adopted by the various GCC countries."

Due to high levels of project postponements, Q4 2016 now has c.USD 30.1bn worth of projects planned for award. While the total value of planned projects is quite high, this stems from the fact that multiple mega-projects which were expected to be awarded this year have constantly been delayed. As further delays for projects are still expected, using Contax Partners’ Tiering methodology (where Tier 1 projects have a 70% or greater probability of going ahead and Tier 2 projects have a 30% probability of being awarded), Contax Partners forecasts that only c.USD 16.4bn worth of additional projects have a realistic chance of being awarded next quarter. Thus, total capex spends have been further revised down to c.USD 45.5bn by the end of the year. Of the projects that have a realistic chance of being awarded in Q4 2016, the power, refining and water & waste sectors are expected to be the dominant sectors. In addition, Q4 2016 is expected to see most spends in Saudi Arabia, Qatar and Kuwait.

As Q4 2016 presents a few opportunities in a difficult market place, Contax Partners can support project owners, contractors and suppliers understand market conditions, maximize the opportunities that are present in the region and guide them on the underlying risks related to execution. Through its dedicated research team and detailed Tiering methodologies, Contax Partners can help companies evaluate which projects are likely to go ahead and which projects are likely to suffer delays. For more information on how to consolidate your position and take advantage of a challenging energy market, contact Ann-Marie Carbery at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Contax Partners assists project owners, contractors and suppliers to maximize opportunities associated with these projects, guide them on the underlying risks related to execution and the effects of increasing project workload.

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Since our establishment in 1985, Contax Partners has been the advisor of choice for companies operating within the constantly evolving Middle East, Russia and Africa energy sector. Having operated in the energy market for over 30 years, we have a track record of empowering our clients to win business. Contax Partners is well placed to understand the challenges, and what impact these can have on your growth plans for the Middle East, Russia and Africa.